07/31/2012

FTSE 100, S&P 500 Short Term Forecast

By Thierry Laduguie

FTSE 100 cash 90-min chart

The FTSE has rallied to a level [5706] which is close to the previous high [5718]. The rally must stop now otherwise the potential expanding wedge [(i),(ii),(iii),(iv),(v)] (see chart) will no longer be valid. For example a break above 5718 would cancel the pattern. As I write the FTSE is near that level so I am not highly confident in the expanding wedge pattern right now. That's because the S&P 500 does not appear to have completed its rally, if the S&P rallies further the FTSE will break into new highs and the bearish pattern will be cancelled.

If the FTSE remains below 5718 and underperforms the S&P then we will continue to assume the pattern is an expanding wedge. Markets have been strong in the last few days driven by the Fed meeting tomorrow and the ECB meeting on Thursday. Investors could be disappointed tomorrow if they don't hear good news. In the past a few strong rallies have ended after a Fed announcement. Yesterday's high marks the end of wave (iv), the next move should be wave (v) down to the 5400 area.

Of course if the FTSE breaks above 5718 the forecast will change as this move would support a continued rally to the 5740 area.

The S&P hit 1391 and pulled back, however the size of the pull back is too small. In an upward zigzag [(a),(b),(c)] wave (b) should at least retrace 38.2% of wave (a), so the target for the pull back is near 1367. From that level the S&P should rally to 1400 to complete wave (c) of a triple zigzag from the June low. The last rally could coincide with the Fed meeting tomorrow.

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